Xylem Inc（XYL.US）Pure~play water leader with attractive growth profile. Initiate Buy.

Investment Rating - The report initiates coverage of Xylem Inc with a Buy rating and a price target of $165, indicating a favorable outlook for the company [1][5][9]. Core Viewpoints - Xylem Inc is positioned as the leading pure-play water company, expected to achieve a mid-single-digit (MSD+) growth profile, which is less cyclical compared to peers. The company has a margin expansion opportunity of approximately 100 basis points per year [1][5][9]. - The growth outlook is supported by several secular trends, including aging water infrastructure, government funding for upgrades, stricter regulations on water quality, and global urbanization [3][5][25]. - The company generated approximately $7.4 billion in sales for FY23, with a diverse product suite that includes water flow, test and measurement, and treatment/filtration equipment [7][9]. Summary by Sections Investment Thesis - Xylem is expected to benefit from substantial demand for replacement and new equipment due to aging infrastructure in developed economies, supported by government funding and regulations addressing water contamination [3][5][25]. - The company is projected to achieve a sales compound annual growth rate (CAGR) of around 6% through 2028, which is above the market's expectations [3][5][27]. Financial Projections - Revenue projections for Xylem are as follows: $8.6 billion in 2024, $9.0 billion in 2025, and $9.6 billion in 2026, with net earnings expected to reach $1.0 billion in 2024 and $1.2 billion in 2025 [1][12]. - The report anticipates an EBITDA margin improvement from 16% in 2024 to 20% by 2028, reflecting the company's operational efficiency and strategic pricing actions [4][12]. Market Drivers - Key market drivers include the estimated $625 billion funding need for national drinking water infrastructure over the next 20 years, with over $50 billion allocated by the Bipartisan Infrastructure Law for improvements [6][26]. - Urbanization trends indicate that approximately 68% of the global population will live in urban areas by 2050, increasing the demand for water infrastructure and treatment solutions [6][26]. Competitive Positioning - Xylem's balance sheet is strong, with a net debt to EBITDA ratio of 0.7x, positioning the company favorably against its peers [5][11]. - The company is currently trading at a premium compared to its peers, reflecting its higher growth potential and lower cyclicality [14][18].